An opportunity to indulge in schadenfreude at the expense of a mortgage lender is offered by HSBC v Dyche [2009] EWHC 2954 (Ch) where a claim for possession by a mortgagee was dismissed because the actual occupant of the property was beneficiary under a constructive trust. The decision gives an example of the doctrine of the common intention constructive trust, and touches on the preconditions for overreaching to occur.
I’ll take a slightly different approach to the court and discuss each issue as it arises in the chronology.
the Constructive Trust
In 1976 Mr and Mrs Collelldeval (the C’s) moved into the property, which they held on trust for themselves as joint beneficial tenants. In 1988 Mr C was declared bankrupt (severing the joint beneficial tenancy). Some efforts were made to reclaim the property from the C’s by the trustee in bankruptcy and the Coventry Building Society (who held a charge over the property) but neither succeeded.
At this time (unsurprisingly) the C’s were unable to obtain a mortgage on the property to (for example) discharge the Coventry Building Society mortgage or otherwise deal with their indebtedness. Shortly before his discharge from bankruptcy Mr C appears to have come to the following agreement with those involved.
- the property would be sold to the C’s’ daughter Amanda-Jane Dyche (the first defendant) and her husband (the D’s) for £25,000 (a price that did not represent the value of the house)
- the proceeds of sale would be used to discharge the Coventry Building Society’s mortgage, leaving £18,000 to be paid to the trustee (and thus for the benefit of Mr C’s general creditors) and a small surplus for other purposes
- the D’s would borrow £17,000 from Lloyds’ Bank secured by a mortgage on the property (and borrow a further £8,000 from a friend
- the C’s would continue to live in the property and pay the D’s instalments to be used to reduce the mortgage indebtedness
- when the Lloyds’ mortgage was discharged, the property would be re-conveyed to the C’s
The judge believed Mr C’s evidence that this was the deal because he (and his late wife) had continued to beneficially occupy the property. They had made payments to the D’s and some contemporaneous documentation also appeared to support his contention.
His analysis was that the arrangement created a common intention constructive trust with the D’s as trustees and the C’s as beneficiaries. Mr C has (of course) no interest in the property so could not convey it to the D’s but that, thought the judge, was really irrelevant because a constructive trust could be imposed from the moment of conveyance.
What kind of beneficial interest?
Mr C suffered more misfortune because in August 1994 Mrs C died. Mrs D argued that Mr C must have held the property as a beneficial tenant in common, as a result Mrs C’s interest would have fallen into her estate (and one presumes some of it might have come to Mrs D). The judge found no reason to accept that. The C’s had held the property as joint beneficial tenants until 1988 and would have continued to do so but for the bankruptcy.
Overreaching
The D’s divorced some 9 years later. In the divorce it was agreed that Mr D would sell his interest in the property to Mrs D for £5,000. At the same date, Mrs D obtained a mortgage from HSBC. In order to convince them that Mr C had no interest in the property she gave them a copy of an assured shorthold tenancy showing Mr C as a tenant and with a forged version (as the judge found) of his signature.
Mr C got wind of the transfer of the property into Mrs D’s sole name. She told him that she would transfer the property to him once the transfer to her had completed. The judge called this a deception (the transfer had already happened). The HSBC mortgage was used (amongst other things) for Mrs D’s own benefit, although some money was paid to discharge a debt to Lloyds (more on this later).
It was argued by HSBC that Mr C’s interest had been overreached by the sale and mortgage. I cannot see how such an argument can hope to have succeeded since (as any student knows) for a statutory overreaching to be effective the proceeds of sale (or mortgage) must be paid to 2 or more trustees. In this case they were not.
There was some discussion as to whether there were two transactions (transfer to Mrs D, then mortgage) or one (on the principle of Abbey National Building Society v Cann [1991] 1 AC 56, but of course either transaction taken individually or both taken together involved one and one only recipient of the purchase money.
This was not the first basis for the court’s decision. The judge held that in the transfer to Mrs D she was not a good faith purchaser (a requirement of statutory overreaching) since she was acting in breach of trust. As a result that transfer could not overreach Mr C’s interest.
The Result
The end result was that Mr C remained a beneficiary under a trust of the property. Since he was in actual occupation his interest overrode that of HSBC. He won, they lost. As the judge pointed out: they could have made more enquiries but they did not. A textbook example of the operation of overriding interests and one that should not have surprised the bank once the constructive trust point was found in Mr C’s favour.
What about the Lloyds’ mortgage? You remember there was an original loan secured on the property which Mr C was supposed to pay off. There was also another loan, some of which was paid off by the HSBC mortgage. What about subrogation I hear my readers ask? No-one was able to – or had thought to – produce sufficient evidence to make that argument a runner. The court was not able to tell even if the second loan had been secured on the property (in which case the subrogation argument might have been good) or not and it appears that the first loan was paid off before the HSBC mortgage.
An interesting case. I would be interested to know what readers think about the “not a purchaser in good faith” point.